Rayonier Inc. (RYN) Earnings Call Transcript & Summary

[indiscernible] session. This is the Rayonier presentation. My name is Buck Horne. I'm the Raymond James Housing, Timber and Residential analyst. Really thrilled to be able to bring back Rayonier. I think it's a very timely idea. In fact, we've added it to our analyst current favorites list. It's one of the most compelling value stories that I've got on my entire coverage list right now post the completion of the PotlatchDeltic merger. We've got Wayne Wasechek, the new CFO of Rayonier, the former CFO of Potlatch here; Mark McHugh, the CEO, to my left as well; Collin Mings, who's a great friend of the firm as well. So happy to run through the story here, all the different news items from the merger as well as I just want to highlight for you the valuation of this story in particular. It is the second largest landholder in the United States, over 4.1 million acres as well as a top 10 U.S. lumber producer, which you get entirely for free. And basically, if you just value the land holdings alone, it is less than, I think, $1,900 an acre for some of the most prime U.S. forestry in the continent. So with that, I will hand it over to Mark, and we'll run through the story.

All right. Thanks, Buck, and thanks, everybody, for joining us today. I'm going to give a brief intro on Rayonier referencing a few slides from the investor presentation that we posted to our website earlier this week, and then we'll open it up for Q&A. So let's start on Page 4, which summarizes the rationale for our recent merger with PotlatchDeltic. And really, the key theme here is that we believe the combination creates a much stronger enterprise, and we expect to realize benefits from this transaction that really neither of us could have achieved independently. In terms of the strategic benefits, the deal significantly expands and diversifies our timberland portfolio, which now comprises about 4.1 million acres. The merger also enhances our platform to execute on real estate opportunities as well as land-based solutions. Lastly, we now have exposure to a very well-positioned Wood Products manufacturing business, which we think gives us another lever with which to optimize our overall portfolio value. In terms of the financial benefits, first and foremost, we expect annual run rate synergies of $40 million. We also believe that the larger scale and better trading liquidity of the combined company will translate to an improved cost of capital over time. And lastly, from a balance sheet perspective, the combined company is very well positioned with a conservative leverage profile and significant capital allocation flexibility. So skipping ahead to Slide 6. Here, we provide an overview of the asset profile of the combined company. Again, we now own about 4.1 million acres of timberland, including roughly 3.2 million acres in the U.S. South and about 930,000 acres in the Northwest, primarily in Idaho and Washington. In addition, we own 6 sawmills with total capacity of 1.2 billion board feet annually as well as one plywood facility. On the real estate side, we now have 3 real estate development projects, including Wildlight, Heartwood and Chenal Valley. And we also have what we believe is really the market-leading rural HBU platform. And lastly, within Land-Based Solutions, the combined company now has 80,000 acres under option for solar development, about 154,000 acres under lease for carbon capture and storage. And we're also very well positioned to participate in the carbon offset market going forward given the much larger footprint of land that we have. Slide 7 highlights some of the key trends that we're seeing driving value creation opportunities within the portfolio. And they all generally center around transitioning land use to a higher-value purpose, such as rural HBU, real estate development or land-based solutions. Rural HBU is a business that's long been part of our strategy. We generally sell 1% to 1.5% of our Southern acreage annually into higher and better use markets, typically at premiums ranging from 50% to over 100% above timberland value. And that's a business that's been a very steady contributor for us over time. But land-based solutions and real estate development, that's really where we see the significant growth opportunity for the company going forward. Our Land-Based Solutions business includes activities such as leasing land for solar development, leasing land or really subsurface pore space rights for carbon capture and storage or monetizing the carbon stored in standing timber through the carbon offset market. Our real estate development business involves investing in entitlements and horizontal infrastructure improvements, really with a view towards significantly enhancing the value of very select portions of our land base as well as some of the adjacent lands within our portfolio. And this next slide illustrates why we're really excited about these new growth opportunities. What this chart shows is the potential value uplift per acre that we believe can be achieved by transitioning land use from core timberland into one of these higher-value uses. So we generally think of Southern timberland as being valued in the range of $2,000 to $3,000 per acre. But if we're able to transition that acre of timberland into a CCS lease or solar lease or development use, that has the potential to increase the value of that acre by as much as 15x. So again, we see significant value creation potential from optimizing our land use, and we're spending a lot of time looking through the portfolio and identifying these types of opportunities that we can really execute on. Slide 9 provides an overview of the combined company's timberland portfolio. Again, roughly 3.2 million acres in the U.S. South, about 930,000 acres in the Northwest. And as you can see from this visual, the portfolio is very well diversified in both regions. As we've discussed in the past, timber supply-demand dynamics are highly localized in nature. So we think our shareholders will really benefit from this diversification impact of the merger. Skipping ahead to Slide 11, we provided a snapshot of the company's Wood Products manufacturing operations. As I noted earlier, we have roughly 1.2 billion board feet of lumber capacity across 6 sawmills, which positions the company as a top 10 lumber producer in the United States. Of course, Rayonier didn't own any manufacturing assets prior to the merger, but we're really excited about the opportunity to integrate this very large-scale, low-cost lumber platform into the portfolio. Skipping ahead to Slide 14, I'll just touch briefly on our real estate business and some of the trends that we're seeing here. Over the last decade, both Rayonier and PotlatchDeltic have seen significant increases in our HBU value realizations. And both companies have also seen a shift in their sales mix towards these higher-value development sales. So we're certainly encouraged by the fact that land values have continued to appreciate despite some challenges that we've seen in timber markets over the past couple of years. So again, really excited about combining these operations and leveraging our HBU platform over a larger land base. Skipping ahead to Slide 16. Here, we provide an overview of some of our focus areas within the Land-Based Solutions business. We've been working really hard over the past few years to build up a pipeline of opportunities in land-based solutions, and this pipeline should translate to meaningful cash flow growth in the coming years. As I noted earlier, we have about 80,000 acres under option for solar development, over 150,000 acres under lease for carbon capture and storage. So as we start to see some of these solar options convert into solar leases and as we start to see some of these CCS leases convert over to injection royalties over time, this should really drive significant growth in cash flow per acre relative to what we're able to achieve on those acres through our timberland operation. So again, see a lot of upside potential here. We're also really excited about carbon markets going forward. Your key buyers of carbon offsets are increasingly looking for very large-scale projects to meet their net zero ambitions. And we feel like the combined company is going to be much better positioned with a larger footprint to be a supplier of choice into that market. Skipping ahead to Slide 18, I just want to touch briefly on some of our capital allocation priorities. One of the key factors that really allowed this merger to come together is that both companies shared a very similar philosophy around capital allocation. Our mantra around capital allocation at Rayonier has always been to be nimble and opportunistic with a view towards building long-term value per share. And we're absolutely going to employ the same mindset going forward as a combined company. Specifically, we plan to focus on maintaining our investment-grade credit ratings, returning capital to shareholders through sustainable dividends, repurchasing our shares opportunistically and continuing to make strategic investments in the business when it makes sense to do so. With all that said, as we discussed on our recent earnings call, we certainly see share buybacks as very compelling right now. So the bar for external growth is pretty high. And I would note that we have been active in the buyback market here recently. And so that's a quick flyover of the newly merged company as well as some of the opportunities that we see ahead. Again, really excited about the value creation of the merger and looking forward to working through the integration here in the coming months. With that, happy to open it up to Q&A.

Sounds good. Thanks. Let me back away from this amplifier. Thanks, Mark. I appreciate that. So let me start with your thoughts on -- as you completed the merger a little bit sooner than expected, I think, ahead of schedule. But as you've gone through the process in integrating these companies and really getting to know the Potlatch assets, is there anything that's come to your attention that is kind of surprising or getting you excited that you may not have fully appreciated in that portfolio or how it fits into the Rayonier scheme? Or -- what have you learned as you've gone through the process?

Yes. I mean, we're all about 4 weeks removed from closing the transaction. And so no major surprises thus far. I would say probably the biggest upside surprise has really been just the cultural compatibility of the 2 organizations. I've been really pleased with just the shared corporate values, again, shared philosophy around shareholder value creation. I think the new leadership team has really hit the ground running, has integrated very well. We had our first Board meeting as a combined company a couple of weeks ago. And again, really pleased with the Board chemistry and how everybody is really kind of rolling in the same direction. So no major surprises, but overall, really pleased with how the companies are integrating and really pleased with, again, that cultural compatibility of the 2 organizations.

That sounds good. And one of the things we've kind of struggled with is trying to figure out how both, all these timber REITs fit into the public markets longer term, try to close these NAV gaps relative to private market valuations. And it seems like that gap has only widened even further even post merger. So I'm just -- what are you thinking? How does this get addressed going forward? You've mentioned you're active on the buyback already. Can you maybe talk through the dry powder you have post merger? What's the strategy there? And what else do you want to do to kind of close this NAV gap?

Yes. No, it's a great question. And look, the timber asset class has been in the public markets for 25-plus years. And we've certainly seen these periods of dislocation where public market values have been below, but we've also seen periods of time when public market values have traded at a premium to private market values. Obviously, we can't control the stock market dynamics. All we can really do is try to capitalize on those opportunities when we see them. And so our mantra around capital allocation, again, is always to be nimble and opportunistic. So when the stock price was very strong, we were active under the -- our at-the-market equity issuance program, and we were acquisitive buying timberland. And here more recently, we've been active in the buyback market, trying to capitalize on that discount that we see. We believe right now, the cheapest place that we can buy timberland is in the public market by buying back our own stock. And so like I said, that bar for external growth is pretty high right now. But we don't think that we'll be here perpetually. We've seen these cycles before. I will say that this most recent disconnect has probably been more pronounced and longer dated than we've seen in the past. But again, for the time being, we're going to try to capitalize on it. And we do think that longer term, look, I still believe in efficient markets. I don't think you should be able to buy timberland assets at a big discount in the public market versus what they cost in the private market. And so again, we're going to continue to focus on closing that gap and sort of controlling the controllables to get there.

Yes. No, it's remarkable. And just relative to basically any other what I'd consider a store value asset class, gold or silver and particularly other land asset classes compared to agricultural and farmland values, which seem to keep increasing every day and every week now. So timberland...

And again, just on that point, I mean, we've certainly seen that dynamic in the private market. We made the point on our last earnings call that land values and higher and better use values have continued to trend positive. We just haven't seen it in the stock market. So again, we're going to lean in when we have those types of opportunities to monetize land at significant premiums to both what we believe it's worth as timberland, but also what we're -- the implied value that we see in the public market and continue to try to take advantage of those opportunities.

Yes. No, absolutely. And you've highlighted the various categories of alternate uses, solar, carbon capture. Obviously, there's residential possibilities, commercial land leasing possibilities. So -- if we think longer term, if you're kind of thinking through the path of development for all your categories of land, realistically, what kind of percentage of the portfolio could fall into one of these higher, better use categories over a 10-year time horizon? I don't know if that's a hard -- that's a hard question to answer, but...

Yes, that's a really tough question to answer. But I guess I'd take a step back. I mean, as we think about the magnitude of value lift that we believe can be achieved by transitioning land use into these, again, much higher value uses, you don't need to transition a whole lot of acreage before it really starts to impact your portfolio value. Again, when you think about the prospect of converting 3%, 4%, 5% of your land into a use that's 10x more valuable, you do the math and that translates into 30%, 40%, 50% value lift for the entire company. And so just for some context there, again, we have 80,000 acres under option for solar development, 150,000 acres under lease for carbon capture and storage. Again, not all of those acres will ultimately get converted into solar land leases or injection royalties. But what we're really focused on right now is kind of building up that pipeline of opportunities. And on the real estate development side, again, that's an arena in which we see even more meaningful value lift relative to underlying timberland value. And we have a very unique and high-value portfolio, particularly in this Northeast Florida area. Essentially, you go north from downtown Jacksonville and you get to the intersection of I-95 and A1A. And Rayonier owns a good portion of the land at the Northeast and Northwest quadrant of that intersection. So again, for those that have been on a timberland tour, I often tell people, you've probably never been on a timberland tour that's 15 miles from an international airport and 15 miles from Ritz-Carlton on the beach. And that's really what we own there in that area of Northeast Florida. And again, the play for us in that area has always been really to catalyze value creation over a much larger land base. If we owned a 1,000 acres there, we never would have undertaken the Wildlight development project. But we own 50,000 acres within a 10-mile radius of the epicenter of that project. So really, the play for us has always been to create that catalyst for growth, create that catalyst for value creation and then realize the benefits of that over a very large footprint of land.

That's great. I wanted to just ask a little bit more about solar, just with the increasing demand for electricity on the grid strains on -- it seems like that could have long-term legs for growth possibilities. What's the -- you got the 80,000 under lease now. When does that start to convert to cash? Or what kind of -- what's the process of getting that hooked up, creating the royalty stream and then kind of growing the book of business from there?

Yes, we have 80,000 acres under option for solar development. We currently only have about 600 acres that are actually under solar lease. And so most of these options, they tend to be anywhere from 5 to 7 years in duration. And so the counterparty has to go through the interconnection study. They have to go through the permitting process. And so it is a pretty long-dated process. We've really been building up that pipeline in earnest for the last, call it, 3, 4 years. And so over the course of the next 2 or 3 years, we expect more of that option portfolio to start maturing. We'll see some portion of that convert into these long-term land leases. And then longer term, we think this is a business that should be a steady contributor to cash flow growth. If you look at projections for utility scale solar development, it points to somewhere in the vicinity of 30 to 40 gigawatts annually. Just for context, 1 megawatt of generation capacity requires about 7 acres of solar panels. And so that 30 to 40 gigawatts of projected utility solar development translates to a land need of about 210,000 to 280,000 acres annually. So again, it's a very significant land need. And again, as a large landowner that owns 4 million acres, we think we're really well positioned to supply land into that purpose.

That's great. Very encouraging. Let me pivot to lumber just a little bit. In terms of what you're seeing so far with the spring construction season, it feels like we're off the bottom in terms of cash market pricing. Your thoughts on kind of the changing regulatory/tariff environment, how that's playing out with supply into the U.S. market or any imports, exports from Canada. What's your latest update we can get for the lumber market prognostication?

Yes. We have seen a lift here in lumber prices in recent months. And I'd say that, that has probably been more supply side driven than demand driven. I'd say demand has been relatively flat. I think most forecasts for housing starts in 2026 are pretty flat to 2025, if not even slightly down. But again, from a supply side standpoint, we've continued to see mill shuts in Canada. That production is being made up for with incremental production in the U.S. So even in a relatively flat demand environment, we think the supply backdrop is much more constructive for 2026 versus 2025. And again, overall, I think if we continue to see some relief in mortgage rates, that could also open up some increased R&R spending. Again, people tend to spend on repair and remodel, either right after they buy a house or right before they sell a house. And so if we can continue to see mortgage rates trending in the right direction, we think that could also unlock some R&R spending.

Yes. Perfect. And can you just remind us what's the sensitivity level as lumber prices move higher from here? What kind of cash flow drop-through does that bring to the bottom line? Also, what's -- think through the cost basis or what's your efficiency level in terms of where you fit in terms of your cost to produce relative to some of the competition that's out there?

[indiscernible] you take that.

Yes. Thanks, Mark. Yes, for us, Mark talked about earlier our Wood Products portfolio. We have 6 softwood lumber mills. Our annual production capacity is 1.2 billion board feet. So for us, a $10 change in lumber pricing equals about $12 million of EBITDA on an annual basis. And so you can see that really in an increasing pricing environment, that can have really good flow-through for our Wood Products business. And there's also -- lumber pricing will flow through to the rest of our business as well on the timberland side. I mean, we would see pricing go up in Southern timber prices, but especially, we have a unique arrangement in our Idaho landholdings. We have a -- very unique to the industry, given our size in that state, we're the largest private landowner in the state of Idaho. We have over 600,000 acres. And given that relative size to the market, we have the ability to move pricing more, and we have an indexing arrangement. So we sell approximately 75% of our sawlogs are indexed to the price of lumber. So along with our Wood Products business increase in pricing on average would have a $10 increase in price and have about a $3 million impact to EBITDA just in that region alone. So yes, when we see rising prices, that will certainly elevate EBITDA and profitability across the business.

Yes. And I believe -- so just for context, everyone, so I think current composite lumber prices is around $430 per 1,000 board feet-ish, something around that range, kind of mix between Yellow Pine and the Northwest species, the Doug fir and the Hemlock, things like that. But remind me, Daryl, what do you think the Canadian cash cost to produce is marginal is like $550 maybe?

Yes. Shipping to the U.S. [indiscernible].

Yes. So we're probably well over $100 below breakeven for the Canadians. So rough math, $100 change if we can get back into the mid-500s, that's $120 million, $150 million of EBITDA?

Yes.

That's pretty healthy flow-through. And your -- where do you -- how do you feel about your competitive positioning in terms of like the efficiency of your mills versus kind of the private competition that's out there?

Yes. Our mills, we're definitely on the lower end of the cost curve. When we think about the mill set, we look at it in kind of a quadrant. So we're in the kind of first and second quartile of sawmills, which is on the lower end of the cost curve. And if you -- again, we're a top 10 lumber producer, but if you match us up against even some of the larger players, our margins are right in the same range or even better than larger players in the industry. So we're definitely on the lower end of the cost curve, very competitive from that standpoint.

Perfect. Perfect. And can you just maybe pivot a little bit away from lumber to pulpwood and think about the dynamics of that market in the U.S. South, it's a little different in terms of the dynamics from the Northwest. What are you kind of seeing in the -- are we stabilizing in the pulp markets? Have we worked through kind of the salvage timber from the hurricanes? What's the outlook going forward?

Yes. It certainly feels like things have stabilized relative to what we saw last year, which recognize 2025 was something of a perfect storm where you had a really elevated salvage volume in the wake of Hurricane Helene. You had very dry weather conditions, which really contributed to additional supply. What happens when you have these extraordinarily dry weather conditions is it makes timberland areas that are typically inaccessible, easier to access with logging equipment. And so when you have really dry weather, that tends to translate to a spike in supply as well. And so you had that against this backdrop of very elevated salvage volume. And then on top of that, we had some mill shuts, most notably IP Savannah in that Atlantic region. So again, a lot of moving pieces in 2025 and really challenging environment. I will say that mill operating rates on the pulpwood side have ticked up a bit. It feels like that overall demand equation has stabilized, and we're optimistic that we'll see some pricing lift in 2026 relative to 2025.

Perfect.

And recognize as well another point that's worth making is despite some of the declines we saw in pulpwood in some of our key markets, those are still some of the strongest, if not the strongest pulpwood markets in the U.S. South. And so invariably, part of the reason that we saw some mill shuts there was the fact that pulpwood pricing was so high in that area. It's still very high on a relative basis if you look across the U.S. South. But again, we have seen some outsized declines there as well.

Perfect. Anybody want to ask a question in the audience? Yes, go ahead in the back.

You were an investor looking at this space [indiscernible] the competitive landscape, how can you differentiate Rayonier to [indiscernible].

Well, they're all of 2 timber REITs now post the merger with PotlatchDeltic. There were 3, and we merged, so there are now 2. So when we talk about the competitive space on the public side, it's really Weyerhaeuser. And look, I think there are a lot of similarities between the companies. I think one thing that's unique about Rayonier and the combined company is really some of the specific market areas where our land is located. And we talked about this development portfolio that we have. Again, it's a very unique high-value portfolio of HBU land that we have. If you look historically, I think Rayonier has a track record of generating some of the strongest HBU premium realizations within the sector. And so I think that, that's certainly a differentiator for the company. I think we're at a size that we can continue to be very nimble and opportunistic around capital allocation, and we can kind of better move the dial versus a much larger enterprise. So I think, again, we're really at that sweet spot from a scale standpoint, where I think we have sufficient scale to be very efficient on the cost side, but we also can be very opportunistic around capital allocation. We have very attractive leverage profile that's probably better than the competitive peer set. And again, very low cost of debt, which is also very appealing relative to the peer.

All right. Anyone else? Quick ones.

I'm just curious, the transaction market for timber is always a little bit opaque for investors on the outside looking in. What are you seeing that you may -- in terms of portfolios or other pieces that are out there? And kind of what's the appetite right now for bidding on timber? Is it still a robust bidding environment? How competitive is it? Are people taking a step back? What's the private market for transactions like right now?

Yes. From our perspective, the private market remains very strong. By our account, there's somewhere in the vicinity of $10 billion available for timberland acquisitions. We continue to see very strong prices paid for -- particularly for high-quality timberland assets. So again, the private market has continued to trend up. It's continued to perform very well. There's a lot of capital really focused on more climate-oriented investments in timberlands, a lot of enthusiasm around this opportunity in land-based solutions in the carbon offset market. So again, a lot of positive momentum still behind the private market. We just haven't seen in the public equities.

Yes. And post-merger, your balance sheet is still among the strongest in almost any public REIT, quite frankly. And so you're still well below coverage levels for your credit ratings and whatnot. So what kind of flexibility would you have to potentially take leverage up and execute the buyback strategy before you'd even begin to need to think about dispositions or anything else to...

Yes. So we've guided towards wanting to maintain -- we'll certainly maintain our investment-grade credit ratings, but also maintain a net debt to adjusted EBITDA ratio of less than 3x. And we talk about that on more of a mid-cycle basis. So obviously, lumber is contributing or has contributed pretty de minimis EBITDA here for the last couple of quarters. And so we think about kind of managing to that 3x target, we're really kind of thinking of more of a mid-cycle contribution from the lumber business. We also said on the last call, we expect net debt to settle out around $1.3 billion to $1.4 billion here at the end of the quarter, still some moving pieces around transaction costs and whatnot. But that kind of gives you some sense of what type of capital capacity we may have. It's also worth noting we have about $230 million remaining under our prior share repurchase authorization. So again, without getting into specifics, that gives you some benchmarks out there in terms of what type of flexibility we might have.

Got you. And maybe just for clarification, there was a little noise, I think, with the stock dividend and the way the dividend rate had an appearance of being cut. Can you just walk us through how that -- what the dynamics were behind that particular adjustment?

Yes. No. I mean, we really kind of think of it very much as an adjustment and not a cut. And it was also exactly what we did the last time we had a significant stock dividend in -- I guess, it was late 2024. So we had a special distribution as a REIT, we have to distribute our REIT taxable income. And with the large disposition initiative that we've had underway for the last couple of years, we had a large special distribution. I believe it was $2 last year, $1.40 this -- $1.80 last year, $1.40 this year, of which 75% was paid out in stock. And so when we announced that special dividend, we also announced that we anticipated adjusting the dividend to account for those new shares that were issued. And so the absolute dividend level remained the same from a dollar standpoint, but we adjusted the dividend to account for the new shares that were issued. We were clear about our intent to do that when we announced the special dividend concurrent with transaction with PotlatchDeltic back in October. It was exact same adjustment that we made last year when we had this large special distribution. And so again, it was really just adjusting that dividend to account for the new shares that were issued. But really on a shareholder level basis, we maintained the dividend.

All right. Perfect. We'll leave it there. Thank you, everyone, for joining us. Really appreciate it. Thanks, guys.

Thank you.